Many of my clients who filed for Bankruptcy purchased more house than they could afford on the belief, which most of us, me included, had that housing was never going to drop the way it did.  Well…it did.  We now have a situation where people are being subsidized into taking on more debt, more house, etc., by offering incentives to purchase.  And while, yes, I can understand that something had to be done to stabilize the market, I nevertheless believe that providing First Time homeowners with cash to be things which cost hundreds of thousands of dollars, irrespective of whether they can afford it, does nothing to get us out of this hole.

Again, Im not an economist (I would work less hours), nor am I a TV talking head (I would spray tan…more), but I can tell you that I meet countless clients on a weekly basis for both Bankruptcy and for Real Estate in New York City.  The common denominator for the Chapter 7 bankruptcy clients in New York City is that they bought and they couldn’t afford it.  They did it because the market gave them the means to do so (through sub prime loans, no money down purchases etc.)  What we are seeing now almost mimics this.  Tax credits which are basically a band-aid, mixed with low mortgages rates, and FHA loans (which, some, including me, have serious reservations about) have the potential to now bring forth another perfect storm onto the market.

My two cents (adjusted for inflation).

The article, in no uncertain terms, finds that people are literally raiding their 401k plans like there is no tomorrow. Whats the reason for this? Well, it varies on a case by case basis but typically the average worker does not have enough income to cover expenses. And so the result is that in their peak earning years (35-55), people are taking money out of their 401k’s just to survive. Now, my opinion here deals solely with using 401k money to pay your credit card bills when you have a large sum of debt that you likely will not be able to pay back. Here is why I think it’s a horrible horrible idea:

1. I’ve said it before and I’ll say it again: Filing for Bankruptcy is an emotional decision. If you have a 40k income and you’re 40k in debt, mathematically speaking, due to interest, etc., chances are you’re never coming close to paying that debt back. Which means that, mentally, you’re likely thinking whatever money you have in your 401k will save you from having to file Bankruptcy for some time. That you can make this work. That if only you received a small raise, you’d be fine. You are inevitably wasting money here. Even if you raid your 401k to pay off portions of your credit card debt, you’re still likely to have CC debt leftover, and that debt will accumulate with the absurd interest thats likely being charged. Again, you’re not dealing with the whole issue.

2. Penalties! If you’re taking a loan out on your 401k, not only are you going to have to pay TAXES on it, but you’re also going to forfeit a 10% penalty! Thats a ton of cash to pay off bills that are growing at around a 30% clip in some cases. Plus, now the debt is not unsecured (as it is with credit cards), now its priority debt. You owe Uncle Sam. Uncle Sam comes after your money much more aggressively than most credit cards do. And, unless you have some special circumstances, filing for Bankruptcy WILL NOT discharge tax debts the way it would discharge debts from credit cards.

3. Your 401k is EXEMPT in Bankruptcy. Just in practical terms lets do the math. You owe $40,000 to various credit cards. You have $20,000 in your 401k. You take it out and use it to pay credit cards. You’re still 20k in the hole, now owe taxes and penalties and have 0 retirement savings. Plus chances are your credit isn’t great at this point either. The converse. You file for Bankruptcy in Manhattan, Brooklyn, Queens, etc., you get rid of the $40,000 in debt, you KEEP the $20,000 in your 401k. So now, as opposed to being negative in the thousands, you actually have gotten rid of your debt AND you have money leftover. Really doesn’t make sense any other way.

Again, BEFORE you raid an account thats protected in Bankruptcy, please please speak with a Chapter 7 Bankruptcy attorney in New York. It could and likely will save you thousands upon thousands.

The first type of client, lets call him/her, “The Filer” (I didn’t go to Law School for originality) comes in and says “Hi, Im in debt way over my head and I need to file for Bankruptcy”. That person, as is pretty obvious, is likely filing for Bankruptcy right then and there. They’ve gone through the options, figured out they don’t make sense and has decided to take control and get out of this debt.

The second type of client is the “Meh” client. This client comes in and knows that Bankruptcy will likely be their best option, but they still have a multitude of concerns. Everything to “When is my credit coming back” to “What happens if I get a higher paying job after filing for Bankruptcy.” However, this client, emotionally, is also ready to file. They just need some reassurance that this is not financial armageddon.

The third type of client is the “Cmon” client. Ive had two of these in the past week. It’s an odd situation. This type of client is different from 1 and 2. They want to be re-assured that Bankruptcy ISNT right for them. And for some people, its not. People who have a small amount of debt and a large amount of income. People who have a large (over $100,000) amount of equity in their homes. People who own brand new cars outright. But many of these people that come see me do not have this issues. They simply believe that Bankruptcy is a trick. “What do you mean I get to get rid of this debt.” “Why wouldn’t everyone file for Bankruptcy then?” “Are you a cop? (j/k)” In any event I explain to these clients that they arent emotionally ready to file (like Jennifer Love Hewitt in the Ghost Whisperer) and that they should take some time to think over their options again. Many of them are in such financial dire straits that there is literally nothing that will get them out of their hole other than Bankruptcy, but they refuse to accept it, and there is only a limited amount I can do as a Bankruptcy attorney to get them there.

Its my pleasure and realistically I am blessed that so many clients meet with us on a weekly basis to discuss their options. Its just that at the end of the day Chapter 7 Bankruptcy in Manhattan is as much an emotional decision as it is a legal one.

No matter what client you are, we’d be more than willing to talk to you about your options.

So what happens next? You call them, they say they have your money and you owe the debt and to pay up because they are just going to collect it anyway? Not a chance. Get a lawyer. Do it yourself. Whatever is preferable to you, you need to understand that as cliche as it sounds for a lawyer to say this…YOU HAVE RIGHTS. They can’t just freeze your account without serving you properly in New York City. And guess what? Many of these firms don’t have the documentation at times to back up collecting the actual debt itself. It’s not as if Citibank can call Pressler and Pressler and say “Hey Jeanine Lopez (fictitious name) owes us $2,000. Go collect” It doesnt work that way. Debt collection is heavily regulated, even though in my opinion, most debt collectors do not follow the rules. Having said that, you need to realize that before you listen to the things they tell you, or the rights they claim to have, you have ways of fighting back. You can request something called validation of a debt, which they are required to provide you. You can file an Order to Show Cause with the Court. You can negotiate the sum due. Just make sure you take a step back, speak to someone, and then decide before losing your hard earned money.

http://www.msnbc.msn.com/id/38130515/ns/business-consumer_news/

Let me know your thoughts guys.  Always eager to hear

In the interim, for the weekend, I’ve decided to indulge in a little bit of self promotion and link you to a page on Law.com which features an interview with yours truly about starting up your own law practice.  This article was originally featured in the New York Law Journal.  Let me know what you think.

So I say again that if you’re planning on filing for Bankruptcy, do not go at it alone.  Its dumb.  It doesn’t work in a large percentage of cases I see.  And don’t go to one of those $399 preparation services.  It’s like bringing your taxes to your uncle who taught Math and saying (Do my taxes!).  He doesn’t know how to do your taxes.  They don’t know how to file for Bankruptcy in New York properly.  Finally, Does anyone want to buy a boat?

Look, no one ever thinks they are going to be the ones sitting in a Bankruptcy meeting and having their debts discharged.  Its clearly not a life goal.  But that doesn’t mean that once you are in a situation like this, that you should do everything you can to avoid it, even at your emotional and financial peril.  had clients who weren’t sleeping for months prior to filing.  Clients who refused to use their own checking accounts for fear of having it frozen, or having their wages garnished.  What I’m saying is that Bankruptcy affords you a way out of this financial mess with a very straightforward procedure.  it allows you to restart your financial life, and in all honesty, your entire life, all over again.  So before you fork over your next minimum payment of several hundred dollar to a credit card that you know you’ll never be able to pay Ive off, at least speak to a Bankruptcy attorney as one of your options.

1.  Many people realistically don’t  know if they qualify for the credit:  Many of my clients, but not all, make a nice amount of income and therefore, based on the income limits set forth by the IRS, may not even qualify for this credit to begin with.  However the majority of first time purchasers I have spoken to (and not just my clients) have had absolutely no contact with his/her accountant before proceeding with the purchase to make sure there are no caveats involved in qualifying for this credit.  They just are hoping they qualify.  Nice.

2. An $8000 credit on a $600,000.00 residence is like me enticing you to buy a Mercedes by offering you a free snickers bar and one shoe.  Lets face it, $8000 is $8000 and were in a recession.  But I would base my decision on whether or not to buy now on factors such as the neighborhood, the price of the place, the interest rate you’re receiving, whether or not you see yourself living there for more than 7 years, and/or whether or not the floors are caving in.  Over the life of a loan for a property worth $600,000.00 or even less, $8000 would mean absolutely nothing at all.  Doesn’t matter, people are still offering their first borns for this credit.

3. If you are purchasing a new construction condominium and you haven’t had the place inspected AND you’re rushing forward because you wanted to fit into this 8k credit, then you’re signing a letter absolving me of any responsibility as your attorney.  Look, I’m not a real estate broker, you can go to Trulia.com for that, but lets face it, there are serious legal consequences involved in buying a home, especially if its a new construction.  Half of Park Slope is suing their developers because their windows are falling off.  Williamsburg looks like California after the Gold Rush left town.  The most important thing I tell clients these days is to get their place inspected and to make sure to list the things that need repaired inside the actual contract itself.  If you’re foregoing this crucially important step which can ultimately cost you tens of thousands of dollars down the line because of an 8k credit, then we you have some ‘splainin to do.

At the end of the day what I see, and what I completely empathize with, is that people are very emotional about the places they want to live and purchase.  The ones that are completely unemotional (Ive found something cheap in a decent neighborhood with a low interest rate, low common charges, good condition, and I get this 8k credit) are the ones that may very well come out ahead.

Ive spoken to several New York City Real Estate attorneys last week, who, like me, were burning the midnight oil attempting to get deals done in time for the deadline.  And they all say the same thing:  We’re happy this is finally over.